2015/16 Assessment of ASX Clearing and Settlement Facilities A1.1 ASX Clear Standard 7: Liquidity risk

A central counterparty should effectively measure, monitor and manage its liquidity risk. A central counterparty should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the central counterparty in extreme but plausible market conditions.

ASX Clear maintains a framework for managing its liquidity risk (CCP Standard 7.1). Under this framework, ASX Clear provides participants with information to assist them in managing their liquidity needs and risks, and employs an experienced Portfolio Risk Manager to monitor and manage ASX Clear's own settlement and funding flows (CCP Standard 7.2). ASX Clear aims to hold sufficient liquid resources to meet its payment obligations on time in the event that the two participants and their affiliates with the largest aggregate payment obligation to the CCP were to default in the extreme but plausible scenarios envisaged in its stress tests (CCP Standards 7.3, 7.8). This level of cover reflects the Bank's supplementary interpretation of CCP Standard 7.3, including the Bank's view that ASX Clear is systemically important in multiple jurisdictions.

The liquid resources held to cover liquidity obligations under stressed scenarios comprise a portfolio of high-quality assets managed by ASXCC on ASX Clear's behalf, supported by procedures which aim to ensure timely and reliable access to liquidity from the portfolio as required (CCP Standards 7.4, 7.6). ASX Clear also has access to a $150 million committed liquidity facility from ASX Limited, of which $100 million is backed by a committed liquidity facility from one of the major banks to ASX Limited. In addition, ASX Clear is able to source liquidity from participants via OTAs to address liquidity shortfalls related to cash equity transactions. To enhance its management of liquidity risk, ASX Clear has access, via ASXCC's ESA, to AUD liquidity from the Reserve Bank against eligible collateral (CCP Standard 7.7). While the use of OTAs with participants should assist in ensuring that ASX Clear does not face a liquidity shortfall in respect of cash market transactions, ASX has nevertheless implemented measures that can address any residual uncovered liquidity shortfalls in respect of derivatives transactions as part of broader enhancements to its recovery arrangements in October 2015 (CCP Standard 7.9). A validation of ASX Clear's liquidity stress test models was completed using an external expert in June 2016.

7.1 A central counterparty should have a robust framework to manage its liquidity risks from its participants, commercial bank money settlement agents, nostro agents, custodians, liquidity providers and other entities.

Sources of liquidity risk

The primary source of liquidity risk in ASX Clear is the potential default of a participant with payment obligations to the CCP. To the extent that the CCP relies on such incoming payment flows to meet its obligations to other participants, it could face a liquidity shortfall. Payment obligations to and from participants may be in the form of payments for settlement of a securities transaction, or initial and variation margin.

ASX Clear also faces liquidity risk from the reinvestment of pooled prefunded resources and the portion of margin posted by participants in the form of cash. These assets are reinvested and held by ASXCC, the holding company for the two CCPs, according to a defined treasury investment policy and investment mandate (see CCP Standard 7.3). Liquidity risk arises since ASXCC would have to convert its assets into cash to meet any obligations arising from a participant default or for day-to-day liquidity requirements, such as the return of cash margin to participants.

ASX Clear does not rely on commercial bank money settlement agents, nostro agents, custodians or liquidity providers (other than participants providing liquidity via OTAs (see CCP Standard 7.3) and liquidity provision by ASX Limited under a $150 million committed liquidity facility) in meeting its AUD payment obligations.

Managing liquidity risk

ASX Clear minimises the size of its liquidity obligations to participants through daily (and in the case of significant market movements, intraday) settlement of variation margin. This prevents the build-up of large liquidity (and credit) exposures. ASX Clear's framework for managing its remaining liquidity risks involves the monitoring of liquidity exposures through daily stress testing (see CCP Standard 7.8) and the maintenance of sufficient liquid resources to be able to meet payment obligations in the event of a participant default (see CCP Standard 7.3). In addition, ASX Clear is able to source liquidity from participants via OTAs to address liquidity shortfalls related to cash equity transactions.

ASX Clear also provides participants with information to help them manage their liquidity needs and risks, which in turn protects the CCP. Participants are provided with sufficient information to understand their intraday margin call obligations, and replicate stress test outcomes. ASX publishes a daily SPAN and CMM margin parameter file that allows participants to estimate payment obligations associated with margin requirements for actual or hypothetical portfolios. Advance warnings and communications in respect of calls for additional margin and margin rate changes also assist participants in their liquidity planning. For example, participants are notified if their stress test results approach their STELs. Additionally, ASX works closely with participants where new obligations are likely to affect their liquidity needs. During the 2015/16 Assessment period, ASX Clear developed additional disclosures to assist participants in understanding their contingent exposure to the use of tools to address a liquidity shortfall, including the potential liquidity impact of the use of OTAs (see CCP Standards 7.3 and 7.9).

7.2 A central counterparty should have effective operational and analytical tools to identify, measure and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity.

Daily cash flows and investment of funds across the ASX CCPs are monitored and managed by a Portfolio Risk Manager. In addition, the CRPM department reviews a daily report of key risk indicators related to liquidity demands. Any issues are escalated to the CRO. Funding arrangements, such as settlement flows, are also monitored in real time by the CRPM and Treasury functions.

Portfolio Risk Management uses reports provided by CRPM to monitor SPAN-calculated margin flows originating from DCS, which feed into ASX's Treasury Management System. Portfolio Risk Management enters trades required to manage daily cash-flows into ASX's Treasury Management System. Post Trade Operations uses daily settlement reports produced by the Treasury Management System to generate settlement instructions in Austraclear. Resulting cash flow movements are monitored in RITS. Margin payments from participants must be made by 10.30 am, while outward payments to participants are manually managed in the RITS queue, and are only released once all incoming margin obligations have been settled (generally by 12.00 pm).

7.3 A central counterparty should maintain sufficient liquid resources in all relevant currencies to settle securities-related payments, make required variation margin payments and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation to the central counterparty in extreme but plausible market conditions. In addition, a central counterparty that is involved in activities with a more complex risk profile or that is systemically important in multiple jurisdictions should consider maintaining additional liquidity resources sufficient to cover a wider range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would generate the largest aggregate payment obligation to the central counterparty in extreme but plausible market conditions.

Reflecting the Bank's supplementary interpretation of the FSS, the Bank has concluded that ASX Clear is systemically important in multiple jurisdictions and therefore subject to the higher financial resource requirement that it should maintain additional liquid resources to cover liquidity needs in the event of the default of the two participants and their affiliates that would generate the largest aggregate payment obligation to the CCP in extreme but plausible market conditions.

Consistent with this requirement, the objective of the ASX Liquidity Risk Policy is for ASX Clear to maintain, with a high degree of confidence, sufficient liquidity to conduct day-to-day activities and manage the default of two participants and their affiliates. In practice, the CCP aims to hold liquid resources sufficient to cover the sum of:

The Default Liquidity Requirement (DLR) across the ASX CCPs. The DLR for ASX Clear is calculated as the sum of AFR and the margin requirement for two defaulted participants. ASX Clear's AFR is comprised of its pooled prefunded resources ($250 million) and its liquidity commitments from ASX Limited ($150 million). The AFR is calibrated to cover the largest stressed liquidity exposures to any two participants and their affiliates, with the exception of peak liquidity exposures to A-rated and B-rated participants (see CCP Standard 7.8). The margin requirement is an estimate of the largest margin requirement for any two participants of ASX Clear and their affiliates, based on participants' margin obligations over the previous quarter. The calculation of ASX Clear (Futures)' DLR is described in Appendix A1.2, CCP Standard 7.3.
An ‘ordinary liquidity requirement’. This is intended to cover day-to-day liquidity requirements, such as the return of margin to participants, and is specified as a percentage of the ASXCC investment portfolio. This portfolio comprises both CCP's pooled prefunded resources as well as the cash margin posted at both CCPs. This is calibrated to the maximum margin outflow in normal market conditions in the ASXCC cash collateral portfolio (as a percentage of portfolio value) over the last 12 months and is reviewed annually.

While ASX Clear's pooled prefunded resources, as well as a portion of margin posted by participants, are in the form of cash, these funds are reinvested by ASXCC (of which ASX Clear is a subsidiary; see ‘ASX Group Structure’ in Appendix A). Accordingly, ASXCC's treasury investment policy requires that a minimum portion of ASXCC's investments must be in liquid assets, such that ASXCC holds sufficient liquid assets to meet the minimum liquidity resource requirement across both ASX CCPs (CCP Standard 7.4). This requirement does not include $100 million of the $150 million committed liquidity facility from ASX Limited. This $100 million is backed by a committed liquidity facility from one of the major banks and is not included on the basis that it is undrawn and therefore not reinvested. ASXCC's Investment Mandate establishes a clear definition of liquid assets: liquid assets comprise cash available for use within two hours, and securities traded in a liquid market which can be sold for same day value with settlement proceeds available within two hours and which are eligible for repurchase with the Reserve Bank.

In the event of the default of a participant with net securities-related payment obligations, ASX Clear's liquidity needs may be significantly greater than its credit exposure. From a credit risk perspective, ASX Clear is exposed only to replacement cost risk from an adverse price movement in the resale of any securities due to be purchased. Funds received from the sale may be used to offset its payment obligation. However, there is a timing mismatch between the point at which ASX Clear must meet the defaulted participant's payment obligation in relation to the purchased securities and that at which it receives funds from the resale of these (typically two days later as of March 2016). This creates a gross liquidity exposure for ASX Clear that may significantly exceed any replacement cost exposure on the same default. As a result, ASX Clear's AFR may be insufficient to meet its full liquidity exposure on a default.

With this in mind, ASX Clear introduced OTAs in April 2014 to enable access to additional liquidity to settle cash market transactions when due, while avoiding the costs of maintaining a significantly increased quantum of outright liquid resources. If a participant were to default due to a shortfall of funds, the ASX DMC would first determine whether ASX Clear could inject sufficient liquidity, from the existing AFR of $400 million, to ensure that settlement of payment obligations occurred as expected.

It is expected that available resources would first be injected. However, if it was not possible or prudent to rely solely on available liquidity, ASX Clear would settle transactions by entering into OTAs with participants that were due to deliver securities to the defaulted participant. In these circumstances, ASX Settlement's back-out algorithm would identify settlement instructions in the batch that, if removed, would reduce ASX Clear's payment obligations on behalf of the defaulted participant to zero, while avoiding an increase in net payment obligations for other participants (see Appendix A2.1, SSF Standard 10.2). ASX Clear would then settle the novated trades that have been identified by the back-out algorithm by entering into OTAs with participants due to deliver securities under these trades. OTAs enable the CCP to settle its payment obligations with these participants on the intended settlement date through an arrangement to offset the underlying settlement obligations to and from those participants.

Under the first leg of the OTA, ASX Clear would, in effect, re-deliver the stock to the relevant non-defaulting participant in return for payment equal to the amount of the payment obligation of ASX Clear to that participant. Under these arrangements, ASX Clear would agree to repurchase the stock the next business day under the second and final leg of the transaction. If this transaction was unable to be settled on the next business day, subsequent OTAs would be entered into on a daily basis until the settlement of on-market close-out trades had taken place.

7.4 For the purpose of meeting its minimum liquid resource requirement, a central counterparty's qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If a central counterparty has access to routine credit at the central bank of issue, the central counterparty may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed.

ASXCC holds an ESA at the Bank to facilitate money settlements on behalf of ASX Clear and ASX Clear (Futures) (see CCP Standard 7.7). As an ESA holder, ASXCC is eligible for access to AUD liquidity under the Bank's overnight and intraday liquidity facilities (against eligible collateral specified by the Bank that is held within its investment portfolio), including in times of market stress.

The ASXCC Investment Mandate requires the Portfolio Risk Manager to maintain high-quality liquid assets to meet ASX Clear's minimum liquidity resource requirements, consistent with the definition of qualifying liquid assets under this standard (see CCP Standard 7.3). Liquid assets must be cash available for use within two hours or held in a restricted set of highly liquid securities eligible for repurchase transactions with the Bank. Securities that could be used to meet the minimum liquid resource requirement include: certain fixed bonds, discount bonds and floating rate notes that have been issued in Australia and are eligible for repurchase with the Bank; and bank bills and negotiable certificates of deposit eligible for repurchase with the Bank. Eligible investment counterparties are discussed under CCP Standard 15. OTAs with participants (see CCP Standard 7.3) also meet the definition of qualifying liquid resources for the purpose of this standard, since they are prearranged, committed and reliable (given that they effectively utilise funds otherwise due to participants).

ASX Clear's committed liquidity facility with ASX Limited is contractually based, and can be considered reliable due to the corporate relationship between the two entities. These funds would be sourced from a combination of ASX Limited's cash resources ($50 million), which are not routinely utilised in any other part of ASX's operations, and a committed liquidity facility with one of the major banks ($100 million). The bank facility is also contractually based, and could only be drawn down by ASX Limited for the purposes of funding ASX Clear's default management liquidity requirements.

ASXCC has made amendments to its investment mandate to clarify how ASX's portfolio will change over 2016/17 to meet the Bank's expectations for the credit and liquidity risk profile of ASX treasury investments (see CCP standard 15.4). These changes will introduce a distinction between ASX's ‘Core’ liquidity (held to meet the Ordinary and Default Liquidity Requirements across the ASX CCPs) and ‘Additional’ liquidity (held to meet uncovered liquidity shortfalls across the CCPs). By 30 June 2017, assets eligible for Core liquidity will be restricted to cash held in accounts at central banks or creditworthy commercial banks and securities issued by the Australian or State Governments (held outright or via repo).

7.5 A central counterparty may supplement its qualifying liquid resources with other forms of liquid resources. If the central counterparty does so, these liquid resources should be in the form of assets that are likely to be saleable or acceptable as collateral for lines of credit, swaps or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions. Even if a central counterparty does not have access to routine central bank credit, it should still take account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances. A central counterparty should not assume the availability of emergency central bank credit as part of its liquidity plan.

ASX Clear does not supplement its qualifying liquid resources with other forms of liquid resources.

7.6 A central counterparty should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the central counterparty or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider's performance reliability with respect to a particular currency, a liquidity provider's potential access to credit from the central bank of issue may be taken into account. A central counterparty should regularly test its procedures for accessing its liquid resources at a liquidity provider.

Participants

ASX Clear's participants commit to provide overnight liquidity to the CCP up to the value of their outstanding exposures to the CCP. This commitment arises from ASX Clear's reliance on OTAs to meet its minimum liquid resource requirement. Unlike other liquidity providers, however, participants' capacity to perform on these commitments is guaranteed, as participants entering into OTAs with ASX Clear provide liquidity in the form of funds they were due to receive as part of that day's settlement.

The exact size of a participant's potential liquidity exposure to OTAs in the event a participant were to default is dependent on the mix and profile of transactions scheduled for settlement after the event of default. Consequently, it is not possible for ASX to provide detailed ex ante information to participants on their contingent liquidity exposures to OTAs. Nonetheless, to assist participants to understand and manage the potential liquidity risks associated with OTAs, ASX Clear introduced in June 2016 monthly disclosures on participants' contingent liquidity exposures. This disclosure shows the daily ‘worst-case’ liquidity exposure for each participant arising from the default of the two participants and their affiliates that would cause the greatest liquidity exposure for the clearing house on a particular day.

ASX Clear consulted on new requirements in respect of participants' liquidity risk management frameworks during the Assessment period. Under the new standards, participants would be required to establish a formal liquidity risk management framework and prepare an annual liquidity plan, which should consider both normal and stressed market conditions. The requirements are expected to be implemented in the Q3 2016.

Other liquidity providers

ASX Clear also relies on a $150 million committed liquidity facility from ASX Limited in meeting its minimum liquid resource requirement. $100 million of this is backed by a committed liquidity facility from one of the major banks to ASX Limited. The contract governing this facility details, amongst other things, the events of default that may trigger activation of the facility. ASX reviews its compliance with the facility terms on an ongoing basis to confirm it has not breached any conditions for drawdown. The remaining $50 million of committed liquidity would be provided by ASX.

Procedures for accessing liquid resources

Consistent with the associated guidance to this substandard, ASX has internal procedures for using its liquidity resources to complete settlement during a liquidity shortfall. The Portfolio Risk Manager, in consultation with the CRO, is responsible for the provision of timely liquidity to fund margin and settlement obligations to non-defaulting participants. The Default Management Standard (see CCP Standard 12.1) provides a high-level summary of the factors to be considered in the liquidation of participant non-cash collateral, as well as the liquidation of treasury investments representing participant cash collateral and other prefunded financial resources. While the order of use of particular collateral types will depend on the particular circumstances, a typical order of use may be cash first, followed by non-cash collateral. The order of liquidation of non-cash collateral to meet funding requirements will depend on factors such as prevailing market conditions, liquidity needs and the amount of funds required relative to the size of each collateral lodgement. Procedures for dealing with liquid assets in the treasury investment portfolio are documented, and are available for Portfolio Risk Management staff at both primary and backup sites.

7.7 A central counterparty with access to central bank accounts, payment services or securities services should use these services, where practical, to enhance its management of liquidity risk. A central counterparty that the Reserve Bank determines to be systemically important in Australia and has obligations in Australian dollars should operate its own Exchange Settlement Account, in its own name or that of a related body corporate acceptable to the Reserve Bank, to enhance its management of Australian dollar liquidity risk.

ASXCC holds an ESA. Accordingly, ASX Clear may, via ASXCC, access AUD liquidity under the Bank's overnight and intraday liquidity facilities (against eligible collateral specified by the Bank). ASXCC's Investment Mandate clarifies its ability to make use of these services, by specifying the list of securities (from the Bank's approved list) available for repurchase, including the securities of the Commonwealth, certain states and major banks (CCP Standard 15).

ASX Clear uses ASXCC's ESA to settle its AUD margin and cash settlement obligations in RITS (see also CCP Standard 9).

7.8 A central counterparty should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. A central counterparty should have clear procedures to report the results of its stress tests to appropriate decision-makers at the central counterparty and to use these results to evaluate the adequacy of, and adjust, its liquidity risk management framework. In conducting stress testing, a central counterparty should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also take into account the design and operation of the central counterparty, include all entities that might pose material liquidity risks to the central counterparty (such as commercial bank money settlement agents, nostro agents, custodians, liquidity providers and linked FMIs) and, where appropriate, cover a multiday period. In all cases, a central counterparty should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains.

ASX Clear uses daily liquidity stress testing to assess the adequacy of its liquidity arrangements. The stress test model, which is adapted from ASX Clear's credit stress tests (described under CCP Standard 4), calculates the maximum liquid funds that ASX Clear would need to access in order to meet obligations arising in the event of the joint default of two clearing participants and their affiliates. The liquidity stress tests make a worst-case assumption with respect to the timing of option premium payment receipts: default is assumed to occur just prior to receipt of the previous day's option premium payments, if owed by the defaulter.

ASX Clear's liquidity stress tests currently apply different assumptions depending on the size and credit standing of the defaulted participant. The liquidity stress testing combines the results from two independent but related models: one for derivatives transactions and one for the cash market. Since securities settle on a two-day cycle (following the transition from a three-day cycle in March 2016), liquidity stress tests for the cash market use projected cash inflows and outflows from settlements and margin payments to calculate the cumulative liquidity requirement for each of the three days following a participant default. The stress test result used in the liquidity stress test model is taken from the day with the largest cumulative requirement. The cash market and derivatives stress tests each apply three default scenarios, combined with a number of market change scenarios (described below). For A-rated and B-rated participants, however, the cash market liquidity stress calculations are based on the assumption that, for these large participants, excess liquidity exposures generated by the securities settlement cycle would be addressed through OTAs entered into with non-defaulting participants (see CCP Standard 7.3). The cash market liquidity stress test calculations for these participants therefore reflect mark-to-market close-out losses under the various market scenarios; the liquidity obligations associated with such losses would be crystallised on the third day following a participant default. The market change scenarios for the liquidity stress tests were amended in July 2015 to reflect changes made to the credit stress test model (see CCP Standard 4.6).

For the liquidity stress test, two market change scenarios are applied: an increase of either 9.8 per cent or 13.0 per cent (depending on recent market conditions), and a decrease of 15.5 per cent. In the cash market stress test, the default scenarios apply different assumptions to:

the priming of settlement accounts before default (either 90 per cent or 100 per cent of deliverable securities are assumed to be in the defaulted participant's settlement account)
the use of non-novated transactions to offset obligations in respect of novated transactions
whether the defaulter's sell transactions are deferred for two days or settled as soon as securities are available.

The three default scenarios for the derivatives stress test assume that ASX Clear is able to transfer all, some or no loss-making client accounts.

The results of the liquidity stress tests are compared with ASX Clear's AFR (currently set to $400 million). An ‘excess report’ is raised whenever a stress test result exceeds the AFR; however, where such excesses are due to cash market transactions, ASX does not consider the excess a breach of the AFR. When assessing the materiality of a liquidity stress test breach, the CCPs will consider contributing and mitigating factors, such as changes in the ICR of the participant, atypical trading activity, and any AIM that is being held. Given that liquidity resources are maintained on an aggregate basis (in ASXCC), in order to test the sufficiency of ASX's overall liquid resources the results of liquidity stress testing for each CCP are aggregated to calculate the total DLR.

The results of liquidity stress testing are regularly reported to ASX senior management, the Clearing Boards and the Bank. All liquidity stress test breaches are reported to: the CRO; the Senior Manager, CRPM; the General Manager, Finance; and the Portfolio Risk Manager. A sustained or widely distributed breach may lead to a review of the adequacy of the AFR.

Consistent with the findings of a CPMI-IOSCO report monitoring the implementation of the Principles, and also reflecting the Bank's own analysis and observations arising from ASX's independent validation of its liquidity stress tests, during the Assessment period, the Bank has discussed with ASX how its liquidity stress test approach may be enhanced to better reflect liquidity-specific risks. In light of these discussions, ASX has recently commenced work on a set of enhancements to its liquidity stress test and risk management framework (see Section 3.5.1).

Review and validation

In July 2015, ASX Clear developed a liquidity reverse stress test for ETOs. This differs from the credit reverse stress test approach (see CCP Standard 4.6) by isolating the liquidity implications of ETO positions (since, in extremis, cash market settlement obligations can be met using OTAs). As for the credit stress test model, the ETO liquidity reverse stress test is repeated for a wide range of scenarios. These include assuming the default of multiple participants, and conducting tests of extreme hypothetical portfolios that would generate losses sufficient to exhaust ASX Clear's default fund under plausible market scenarios.

ASX's Model Validation Standard requires that all models that are critical to ASX (as measured against a series of risk factors) undergo a full annual validation (see CCP Standard 2.6). Under this framework the liquidity stress test model must be validated by an external expert every two years. A validation of ASX Clear's liquidity stress test model was completed using an external expert in June 2016.

The Bank will continue to monitor ASX's progress in this area, in light of the recommendations from the validation and continued international work on CCP stress testing.

7.9 A central counterparty should establish explicit rules and procedures that enable the central counterparty to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking or delaying the same-day settlement of payment obligations. These rules and procedures should also indicate the central counterparty's process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.

ASX Clear's OTAs aim to enable the CCP, in all circumstances, to fully address any liquidity obligations related to the settlement of securities transactions (see CCP Standard 7.3). Although OTAs cannot be directly used to address liquidity shortfalls related to derivatives transactions or the return of cash market margin, OTAs used to meet payment obligations for settlements may allow for greater use of prefunded liquid resources for these other obligations.

ASX Clear has developed enhanced arrangements allowing it to comprehensively address a liquidity shortfall (including on derivatives transactions), as part of its broader package of enhanced recovery measures that came into effect in October 2015 (see CCP Standard 3.5). Under these arrangements, prefunded liquid resources and OTAs are supplemented by two additional tools.

Recovery Assessments of up to $300 million, called in cash from surviving participants, provide an additional source of liquid resources from the point at which they are received by ASX Clear (see CCP Standard 4.8). ASX Clear has the flexibility to call for assessments where it anticipates a liquidity shortfall resulting from a participant default, increasing the likelihood that these funds will be available to meet liquidity needs on a timely basis.
Any residual liquidity shortfall that could not be addressed via Recovery Assessments would be addressed via a power to completely terminate all open contracts. Complete termination would be reserved as a last resort tool if there was no other means of addressing a liquidity shortfall (including via intervention of the Reserve Bank as resolution authority if current proposals for a special resolution regime for FMIs are implemented). Under complete termination, all open contracts at the CCP would be settled with participants at their current market value, with any residual liquidity shortfall of the CCP addressed by haircutting settlement payments to participants. Prefunded liquid resources and Recovery Assessments are set at a level that seeks to minimise the potential for reliance on complete termination to address a residual derivatives-related liquidity shortfall.